Trade Finance WORKING DEFINITION
- The function of trade finance is to introduce a third-party to transactions to remove the payment risk and the supply risk while providing the exporter with receivables according to the agreement and the importer with extended credit. Suppliers, banks, syndicates, trade finance houses and buyers all provide trade financing.
|Prepayment occurs when the payment of a debt or installment payment is done before the due date. A prepayment can include the entire balance or any upcoming part of the entire payment paid in advance of the due date. In prepayment, the borrower is obligated by a contract to pay for the due amount. Examples of prepayment include rent or loan repayments.|
Letter of Credit
|One of the oldest methods of trade financing.A Letter of Credit is a letter from a bank that guarantees that the payment due by the buyer to a seller will be made timely and for the given amount. In case the buyer cannot make payment, the bank will cover the entire or remaining portion of the payment.|
Sight Draft − It is a kind of bill of exchange, where the exporter owns the title to the transported goods until the importer acknowledges and pays for them. Sight drafts are usually found in case of air shipments and ocean shipments for financing the transactions of goods in case of international trade.
Time Draft − It is a type of foreign check guaranteed by the bank. However, it is not payable in full until the duration of time after it is obtained and accepted. In fact, time drafts are a short-term credit vehicle used for financing goods’ transactions in international trade.
|It is an arrangement to leave the goods in the possession of another party to sell. Typically, the party that sells receives a good percentage of the sale. Consignments are used to sell a variety of products including artwork, clothing, books, etc. Recently, consignment dealers have become quite trendy, such as those offering specialty items, infant clothing, and luxurious fashion items.|
Open account is a method of making payments for various trade transactions. In this arrangement, the supplier ships the goods to the buyer. After receiving and checking the concerned shipping documents, the buyer credits the supplier's account in their own books with the required invoice amount.
The account is then usually settled periodically; say monthly, by sending bank drafts by the buyer, or arranging through wire transfers and air mails in favor of the exporter.
Accounts Receivable Financing
It is a special type of asset-financing arrangement. In such an arrangement, a company utilizes the receivables – the money owed by the customers – as a collateral in getting a finance.
In this type of financing, the company gets an amount that is a reduced value of the total receivables owed by customers. The time-frame of the receivables exert a large influence on the amount of financing. For older receivables, the company will get less financing. It is also, sometimes, referred to as "factoring".
A banker’s acceptance (BA) is a short-term debt instrument that is issued by a firm that guarantees payment by a commercial bank. BAs are used by firms as a part of the commercial transaction. These instruments are like T-Bills and are often used in case of money market funds.
BAs are also traded at a discount from the actual face value on the secondary market. This is an advantage because the BA is not required to be held until maturity. BAs are regular instruments that are used in international trade.
Working Capital Finance
|Working capital finance is a process termed as the capital of a business and is used in its daily trading operations. It is calculated as the current assets minus the current liabilities. For many firms, this is fully made up of trade debtors (bills outstanding) and the trade creditors (the bills the firm needs to pay).|
|a service providing medium-term financial support for export/import of capital goods. The third party providing the support is termed the forfaiter. and can purchase of the amount importers owe the exporter at a discounted value by paying cash. The forfaiter that is the buyer of the receivables then becomes the party the importer is obligated to pay the debt.|
It is a form of international trade where goods are exchanged for other goods, in place of hard currency. Counter-trade is classified into three major categories – barter, counter-purchase, and offset.
|Accounts receivable insurance (ARI)||An insurance policy purchased from a financial institution or export credit agency (ECA) that exporters may obtain to help secure their receivables in case of non-collection. Accounts receivable insurance can also help maintain regular cash flow.|
|Charges incurred when a shipment must be stored in a warehouse during transit from the exporter to the importer. These charges may be incurred in the event of dispute between parties to a letter of credit (L/C) and can become substantial in a short period of time.|
|International Chamber of Commerce (ICC)||A Paris-based organization that plays a key role in international trade through its Uniform Customs and Practice for Documentary Credits (UCP) and other quasi-regulatory articles that provide the infrastructure for trade among over 160 nations that have voluntarily agreed to be bound by these articles. The ICC has several key expert groups, and provides interpretations and opinions on the UCP as well as arbitration services in the event of disputes between parties involved in international commerce.|
|Factoring||A type of finance where a company sells its account receivables (e.g. incoming invoices) to another company called a factor. This allows the receiving company to get faster payment for an invoice not due yet but at the cost of a discount/fee.|
LC = Letters of Credit
BG = Bank guarantee
BL = Bill of Lading
CWO = Cash with order
COD = Cash on delivery
Here is the Trade Finance guide to terminology used across the trade, supply chain, commodity and agency finance markets. It is not a replacement for legal or financial advice and as the industry changes we will endeavour to update it.
The beneficiary presents its documents together with a bill of exchange payable at a future date stipulated in the credit. The bank accepts the bill of exchange by signing it, and returns it to the beneficiary. Acceptance of a draft obliges the acceptor to pay it at maturity.
The 69 African, Caribbean and Pacific countries which signed the Lomé Convention.
A forward purchase.
ADVANCE FEE FRAUD
Advance fee fraud covers a variety of situations in which a fraudster persuades a victim to pay him an advance commission in connection with the arrangement of financial facilities. Before the victim realises that the deal is a sham and that no facilities are available, the fraudster runs off with the commission.
ADVANCE PAYMENT GUARANTEE/BOND
A guarantee or bond provided by a bank to the buyer. The guarantee/bond undertakes to return to the buyer on behalf of the supplier, usually on demand, downpayments or progress payments made if the supplier fails to complete the contract.
A bank in the beneficiary’s country – usually a correspondent of the issuing bank – through which the issuing bank communicates the credit to the beneficiary. It may also be asked to confirm and/or pay the credit.
An annual fee payable by the buyer, usually to cover the costs incurred by the lender in administering the financing.
The price increase over and above the market price of the traded goods and attributable to the extra costs involved in countertrading.
Any change made to the terms of a credit. The applicant initiates the amendment which then follows the same process as a letter of credit.
The buyer who applies for a letter of credit.
ASSIGNMENT OF POLICY
The assignment of a policy’s rights and benefits from the exporter to a lender.
The date by which a set of documents has to, or will, be delivered to the forfaiter ready for discounting.
An unconditional, irrevocable, divisible and freely transferable guarantee to pay the beneficiary on the due date.
A bank in an importer’s country which adds its aval to notes or bills in a forfaiting transaction.
An institution or person acting as a guarantor.
An evaluation of the average time an asset will be outstanding given a specific repayment system.
BACK-TO-BACK LETTER OF CREDIT
Two letters of credit normally involving the same bank which cover a single shipment of goods, involving a middleman. The second letter of credit is issued only because its issuing bank is happy that the first letter of credit represents good security. In practice this can be hazardous and many banks are unwilling to be involved in back-to-back transactions.
Goods and/or services are exchanged against other goods and/or services of equivalent value. No money changes hands between the buyer and seller. (See countertrade).
One hundredth of one percentage point (0.01%). 100 basis
points = 1%.
The person (for example, the exporter) in whose favour the credit is issued.
The Berne Union is the leading association for export credit and investment insurance worldwide, working for cooperation and stability in cross-border trade and providing a forum for professional exchange among its members.
A bond provided by a bank to the buyer promising compensation, usually on demand, in the event that a supplier declines to enter into a contract in conformity with the bid he has put forward.
BILATERAL CLEARING ACCOUNT
A trading agreement between two countries, neither of which has a hard currency, in which transactions are entered in clearing units instead of a fixed currency.
BILL OF EXCHANGE
An unconditional order in writing addressed by one person to another, signed by the person creating it (drawer), and requiring the addressee (drawee) to pay a certain sum of money to the drawer at a fixed or determinable future time .
BILL OF LADING
Issued by a shipping company to the shipper as a receipt for the goods, a memorandum of the contract of carriage and a document of title.
BLOCKED FUND LETTERS (BFL)
In cases where a fraudster has enticed an investor into a bogus scheme where the invested funds remain on deposit earning interest in the investor’s bank, the investor is told to obtain a blocked fund letter (BFL) from his bank. This letter promises to pay funds from the victim’s account to the holder of the letter. The fraudster, often with the help of a third party such as a lawyer, obtains control of the BFL which he uses as collateral to get a loan at a bank of his choice. The fraudster can then default on the loan and flee. Under the BFL the issuing bank must pay the lending bank and the victim loses his money. However, the banking community does not recognISe BFLs as banking instruments and they should not be issued by banks or accepted as collateral.
Bolero is a neutral secure platform enabling paperless trading between buyers, sellers, and their logistics service and bank partners. Solutions integrate the physical and financial supply chains, providing visibility, predictability, accuracy and security. This delivers improvements in operational efficiencies and reductions in working capital.
An agreement to buy products that will eventually be produced by the capital equipment supplied under the export sales agreement.
A financing arrangement under which a lending bank in the supplier’s country lends directly to the buyer or to a bank in the buyer’s country to enable the buyer to make payments due to the supplier under a contract.
Interim financing replaced by an ECA-backed or pre-export finance solution.
CARRIAGE AND INSURANCE PAID TO (CIP)
The seller delivers the goods into the custody of the carrier and pays for the costs of carriage to the agreed destination. He also effects insurance of the goods at his own cost. The goods travel at the buyer’s risk.
CARRIAGE PAID TO (CPT)
The seller delivers the goods into the custody of the carrier and pays for the costs of carriage to the agreed destination. The goods travel at the buyer’s risk.
CASE OF NEED
The person or firm to whom collecting banks will refer if instructed to do so by collection orders in case of difficulty. The powers of case of need may be advisory only or full and must be specified.
CATEGORY I COUNTRIES
Category I refers to relatively developed countries and is the Consensus classification based on GNP per capita income.
CATEGORY II COUNTRIES
Category II refers to intermediate income countries and is the Consensus classification based on GNP per capita income.
CATEGORY III COUNTRIES
Category III refers to relatively under-developed countries and is the Consensus classification based on GNP per capita income.
The bank entitled to claim reimbursement of sums it has paid in respect of a payment, deferred payment, acceptance or negotiation that it has carried out under the credit.
A collection comprising financial documents only, not goods.
Compagnie Française d’Assurance pour le Commerce Exterieur is the export credit agency of France.
Loans made by a financial institution, such as an export credit agency or a commercial bank, in association with the World Bank or other multilateral development banks.
The provision by a bank of a service to a customer allowing documents proving shipment of customers’ goods to be transmitted via itself and another bank to the buyer of the goods. The release of documents to the buyer, thereby giving him title to the goods, is normally dependent upon payment by him or the promise to pay.
The bank in the buyer’s (drawee’s) country to whom the collection order and documents are directed.
The set of instructions given to the remitting bank by the principal in a transaction. The remitting bank relays the collecting order to the collecting bank.
COMMERCIAL INTEREST REFERENCE RATE (CIRR)
A market rate for the currency concerned plus a margin, set under the Consensus to establish fixed interest rates which are officially supported.
COMMERCIAL LETTER OF CREDIT
A name sometimes given to a variant of documentary credit under which the credit is negotiable by any bank. The issuing bank requires all drawings to be noted on the credit document.
The possibility of non-payment arising from commercial causes such as bankruptcy, insolvency, protracted default and/or failure to accept goods that have been shipped according to the supply contract.
The date on which the plant or equipment supplied is deemed contractually to have been completed according to specification.
A fee, payable usually on a semi-annual or quarterly basis, by the buyer to reserve the availability of a loan. The fee is payable on the undrawn balances.
A single agreement under which the exporter agrees to supply goods and services in exchange for goods and services of an equivalent value supplied by the importer, which the exporter must then sell to finance his original sale.
Export credit insurance or guarantee which covers both commercial and political risks.
A grant or licence by a government or relevant authority of certain land, premises or other public property, or the right to use or commercially exploit such assets for a specified time.
The practice by advising banks of adding their separate undertakings to those of issuing banks and assuming liability under documentary letters of credit.
A bank which adds its own independent payment undertaking to that of the issuing bank. The confirming bank is normally in the beneficiary’s country. The confirmation protects the beneficiary against the issuing bank defaulting, and political risk with regard to the country in which the issuing bank is situated.
An arrangement between OECD (see OECD) member countries which sets the guidelines, including maximum repayment terms and minimum interest rates, for officially supported export credits.
The drawee (importer) in a collection.
The process of handing an applicant the documents in a documentary credit.
COST AND FREIGHT (CFR)
The seller delivers the goods to the ship. Full risk and responsibility pass to the buyer when the goods cross the ship’s rail. The seller pays for the contract of carriage to the agreed port of destination.
COST INSURANCE AND FREIGHT (CIF)
The seller delivers the goods to the ship. All risks and responsibility in the goods pass to the buyer when the goods cross the ship’s rail. The seller pays for the contract of carriage to the port of destination and takes out cargo insurance at his own cost.
A variation of back-to-back credit in which a second bank (usually that of the original beneficiary) issues a separate documentary letter of credit in favour of the second beneficiary.
An exporter’s irrevocable commitment to repay the bank if a bond is called.
Two separate agreements under which the buyer agrees to buy and pay for goods and the seller agrees to buy and pay for goods of a (usually) equal value.
An umbrella term referring to a growing number of trading and financing techniques in which payment is made either wholly or partly in the form of goods (See barter).
The bank’s customer who requests the issue of the credit. For example, in the case of an export sale, the importer.
Insurance provided in exchange for a premium covering the loss incurred by a supplier in the case of non-payment by the supplier’s customer, due to the customer’s legal or de facto insolvency or simple failure to honour its commitments (default), or for political reasons or as a result of force majeure.
Risk that the insured will be unable to recover all or part of the receivable due to the occurrence of a cause of loss.
A guarantee providing cover against possible customs duties. It is often used when goods are imported into the country on a temporary basis. If the goods are not reexported within the prescribed time limit the customs authorities can claim under the guarantee for the customs duties which subsequently become payable.
DAYS OF GRACE
Referred to in forfaiting, days of grace reflect the delay normally experienced in the transmission of payments applicable to the country risk involved. To calculate net proceeds this grace period is added to the actual number of days until the respective debt instrument matures.
DEFERRED LETTERS OF CREDIT
A credit providing for payment at a determinable future date following the presentation of documents which do not include a draft.
The credit sum is payable at a stipulated period of time after presentation of documents.
DELIVERED AT FRONTIER (DAF)
The seller fulfils his obligation to deliver when the goods have been made available, cleared for export at an agreed point and placed at the frontier but before the customs border of the adjoining country. This term is primarily intended for cases where goods are to be carried by rail or road, though it may be used for any mode of transport.
DELIVERED DUTY PAID (DDP)
The seller fulfils his delivery obligation when the goods have been made available at the agreed place in the country of import. The seller bears all risks and costs in the goods up to that point. The agreed point of delivery may, for example, be the buyer’s warehouse or factory. This term represents the maximum obligation on the seller.
DELIVERED DUTY UNPAID (DDU)
The seller fulfils his obligation to deliver when the goods have been made available at the agreed place in the country of import. The risk in the goods passes to the buyer at that point and he is responsible for clearing the goods through customs.
DELIVERED EX-QUAY (DUTY PAID)
The seller fulfils his obligation to deliver when he has made the goods available to the buyer on the quay or wharf at the named port of destination cleared for import.
DELIVERED EX-SHIP (DES)
The seller fulfils his delivery obligation when the goods have been made available to the buyer on board the ship at the agreed port of destination. The risk in the goods passes to the buyer at that moment and the buyer is responsible for clearing the goods through customs.
A form of rent charged on undeclared goods by, for example, ship owners or port authorities. Also charged by container owners on boxes delayed.
FIB or CIF delivery of goods. (See FIB and CIF.) .
The period during which goods are delivered, usually lasting between signature of the contract and delivery of the final items.
DEVELOPMENT BANK or DEVELOPMENT FINANCE INSTITUTION (DFI)
A lending agency that provides assistance to encourage the establishment of productive facilities in different countries.
Payments due from the buyer to the supplier in cash during the contractual period, which are not eligible for financing under a buyer or supplier credit financing.
The commission paid to a third party to market countertrade goods.
The rate by which the future value of a negotiable instrument is discounted. The discount rate is generally calculated as either a discount-to-yield or straight discount.
This expresses the discount rates as a true interest cost, usually on a yearly basis. Maturities over 180 days are mostly subject to semi-annual compounding. The discount-to-yield calculation is the yield a present value will achieve as it reaches its future value (face value) at maturity.
Buying accepted term bills of exchange at a discount to allow for loss of interest on the funds until the bills mature.
When documents presented do not agree with the terms of the credit or with each other.
The refusal to pay or accept a bill of exchange.
A collection concerning goods and entailing commercial documentation.
A letter of credit that calls for the presentation of specified documents, issued to effect payment during a business transaction. It usually provides exporters with an independent bank promise of payment against presentation of shipping documents.
DOCUMENTS AGAINST ACCEPTANCE (D/A)
Where payment is to be made on documents against acceptance (D/A) terms, the presenting bank releases the documents to the importer against his acceptance of a bill of exchanges. Sometimes the buyer must sign a promissory note. The importer gains possession of the goods before making payment and can sell the goods immediately to get funds to pay the bill of exchange, thereby obtaining a period of credit. Payment terms are usually between 30- to 180-days after sight.
DOCUMENTS AGAINST PAYMENT (D/P)
Where payment is to be made on documents against payment (D/P) terms, the presenting bank is authorISed to release the documents to the importer only against immediate cash payment.
(Sometimes referred to as an initial direct payment.) The payment due from the buyer to the supplier in cash before entry into force or effectiveness of the contract. (Usually ineligible for export credit agency support.) .
See bill of exchange.
The period during which the financing is available to be drawn.
The party on whom a bill of exchange is drawn and which owes the indicated amount. In a collection this is the buyer.
The party that issues or signs a bill of exchange and stands to receive payment from the drawee.
ELECTRONIC DATA INTERCHANGE (EDI)
Electronic data interchange (EDI) replaces paper documents with teletransmitted computer messages in a prearranged format.
Different systems of communication exist for financial interbank messages and for non-financial sector businesses. Most corporate EDI operates within a single country. Inter-sectoral and international schemes are still the exception.
Sometimes under projects such as construction contracts the buyer or employer buys and delivers the necessary equipment instead of making the contractor an advance cash payment. The issuance of equipment bonds may cover the transaction.
A bank account set up in hard currency in the joint names of the buyer and seller and in which the various monies involved in the countertrade agreement (usually a forward purchase) are held in trust.
A record of all imports and exports by the parties involved in an agreement that over a fixed period of time a specific ratio of sales to purchase must be achieved.
Restrictions that are applied by a country’s monetary authority, or central bank, to limit the convertibility of the local currency into other specific foreign currencies.
A loan to help the financing of the sale of capital goods and/or services eligible for a minimum repayment period of two years, which is officially supported under the OECD Consensus.
EXPORT CREDIT AGENCY (ECA)
The organisation which provides official support to facilitate exports from its country. Its main function is to provide insurance against the commercial and political risk of non-payment for the exports. Commercial risk cover includes eventualities such as the buyer going into liquidation. Political risk cover includes the eventuality of war, or a change in the importing government’s foreign exchange controls which might prevent the importer from effecting payment. Some export credit agencies provide insurance cover only; others provide both insurance and medium- and long-term finance for capital goods. For a full list of the ECAs see Trade Finance’s annual World Official Agency Guide.
The provision by government or privately-owned companies of financial help to exporters designed to encourage the export of goods. The help may be via the insurance of export receivables and/or guarantees/insurance of export-related loans. Export finance applies to large transactions where credit over a period of years is required. Export finance is required when an importer needs deferred payment terms for the product or services that an exporter seeks to provide.
EXPORT FINANCE LEASE
Sometimes referred to as full payment leases. Such leases are written on a net basis with taxes, insurance and maintenance paid for by the lessee. The lease may include an option for the lessee to buy the item at the conclusion of the lease term at a nominal value of the equipment.
EXPORT OPERATING LEASE
A lease which exchanges the right to use property over a specific limited time period in return for a series of rental payments. The owner or lessor pays any taxes, any insurance and any maintenance charges but also retains the tax benefit of any depreciation and any investment tax credits.
Risk of loss of an investment due to expropriation, nationalISation, or confiscation by a foreign government. This risk is typically covered by political risk insurance.
The purchase from a company of some or all of its trade receivables with or without recourse to the company itself in the event that the receivables are unpaid. The service may also involve administration of the sales ledger for the company.
Querying the status of a collection in relation to the exporter’s instructions to the remitting bank.
The date on which final delivery is effected.
The date on which the final repayment of principal is due.
A fixed sum agreed at the outset of a contract, payable by the buyer for a specified task (also referred to as lump sum).
An interest rate fixed throughout a set period of the loan financing.
An interest rate usually consisting of a variable market rate plus a fixed margin.
Events over which none of the parties to a transaction has control or influence (acts of God).
The purchase (without recourse to any previous holder of the debt instrument) of negotiable trade instruments resulting from the export of goods and services.
A compensation agreement under which the buyer’s goods are delivered to the exporter in advance to enable him to raise the foreign exchange to pay for his own sale.
FREE ALONGSIDE SHIP (FAS)
The seller places the goods alongside the vessel on the quay or in lighters at the named port of shipment. The buyer bears all costs and risks of loss and damage from that moment.
FREE CARRIER (FCA)
The seller hands over the goods cleared for export to a carrier named by the buyer at the place agreed by the buyer and the seller. The buyer is responsible for the contract of carriage and all other formalities.
FREE ON BOARD (FOB)
The seller delivers the goods to the ship and he is considered to have fully carried out his side of the bargain when the goods pass over the ship’s rail. The buyer bears full responsibility from that moment onwards.
FRONT END FINANCE (DOWNPAYMENT FINANCING)
A commercial loan under which separate credit facilities are provided to finance the downpayment and/or other direct payments not covered under a buyer or supplier credit financing.
The period during which no repayments of principal (or principal and interest) are due from borrowers to lenders.
A form of credit where the goods awaiting shipment are required to be stored in the advising bank’s name.
Reducing or mitigating risk, for example protecting against adverse foreign-exchange movement.
ICC (International Chamber of Commerce)
The voice of world business championing the global economy as a force for economic growth, job creation and prosperity. Because national economies are now so closely interwoven, government decisions have far stronger international repercussions than in the past. ICC activities cover a broad spectrum, from arbitration and dispute resolution to making the case for open trade and the market economy system, business self-regulation, fighting corruption or combating commercial crime.
Islamic leasing. An ijara or lease financing involves the Islamic investor (or a special purpose vehicle) purchasing an asset and leasing it to the lessee for a rent that is either agreed in advance or adjusted regularly throughout the lease period, by consent, by reference to an “expert” or, in some cases, by reference to an interest-based index. An ijara is an operating lease with the lessor retaining ownership of the asset after the lease expiry but can be turned into a higher purchase arrangement by the grant of an option for the lessee to purchase the asset on a specified date (ijara-wa iqtina). Shari'a usually requires that the management, maintenance and insurance of the leased assets are the responsibility of the lessor so as to justify the profit made by the lessor, although mechanisms exist for the responsibility for these to be effectively passed back to the lessee.
The International Monetary Fund (IMF) is an organISation of 185 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.
An ICC published set of rules which define the responsibilities of buyers and sellers concerning who pays which expenses in the transit of goods from seller to buyer, over and above the original cost of the goods.
An undertaking issued by a beneficiary or his bank to reimburse a settling bank if the applicant rejects the documents.
INTEREST DURING CONSTRUCTION (IDC)
(Pre-commissioning interest.) Interest payments due during the performance of the supply contract, which might be capitalISed and added to the principal amount outstanding.
INTEREST MAKE-UP AGREEMENT (IMU)
An arrangement whereby a fixed rate loan is officially supported so that the lenders receive an agreed margin over the cost of the lending.
The rate at which interest is payable on any obligation.
The issuing bank and any confirming bank undertake an irrevocable payment obligation towards the beneficiary. The undertaking cannot be cancelled or amended unless the beneficiary agrees.
Islamic finance is based on the principle that money must never spontaneously generate money. Instead, capital must be fecundated by labour, material or intellectual activity, or be invested in a wealth creating activity. Interest is replaced by a return obtained from wealth-generating activities. Islamic banking is regulated by the Sharia Law, Islamic law. The Sharia law encourages the use of profit sharing and partnership schemes and prohibits interest on money. Sources are the Qur’an and the Sunna (teachings from the Prophet Mohammed’s acts and paroles).
The bank which issues a documentary credit. It may also be referred to as an opening bank.
See forward purchase.
LETTER OF CREDIT
A document established by the buyer for the purpose of financing international trade via substituting the bank’s credit for that of the buyer. A letter of credit is usually subject to the ICC Uniform Customs and Practice (UCP600) for documentary credits.
The document states the amount and the terms under which the bank will pay the exporter when documents are presented to the bank.
LETTERS OF INDEMNITY
Letters of indemnity, or guarantees, are sometimes issued by banks when bills of lading or other transport documents go missing on goods shipments. Typically, such guarantees are issued for between 100% and 200% of the value of the goods.
London Interbank Offered Rate (Libor) of interest on deposits traded between banks. These rates are commonly quoted on a one-month, three-month, six-month and twelve-month basis.
LINE OF CREDIT
A buyer credit arrangement set up to finance multiple contracts subsequently entered into and nominated to the lender by the buyer and accepted by the lender as eligible for finance under the line. Lines of credit may either be for miscellaneous capital goods purchases (usually known as general purpose lines of credit) or for multiple contracts associated with one project (usually known as project lines of credit).
Those expenses incurred in the buyer’s country which are provided by the supplier. The export credit agencies do not usually finance or guarantee these costs but may do so up to 15% of the export value.
LOAN GUARANTEES AND GUARANTEES FOR LEGAL PROCEEDINGS
Bank loans are often made conditional on security provided by the borrower or a third party. A bank guarantee is one of the means by which the lender can obtain assurance that the loan will be repaid. Bank guarantee instruments are also issued in respect of legal procedures, for example: legal costs guarantees and distraint guarantees.
Usually any credit period over five years.
A fixed amount agreed at the outset of a contract, payable by the buyer for a specified task.
A bond issued to support a maintenance contract to assure the buyer that the supplier will meet his obligations under the maintenance contract.
The period during which goods are manufactured, usually lasting between signature of the contract and shipment of the final terms.
The ability of one export credit agency to match the credit terms and conditions of another, under the arrangement on guidelines for officially supported export credits.
The date on which a bill of exchange, promissory note or other debt instrument becomes due for payment.
Usually the date on which 50% of the buy value of the units to be commissioned, and thereupon to be handed over to the buyer for use, are commissioned.
Usually the date by which 50% by value of goods to be delivered or the services to be rendered have been delivered or rendered.
Usually any credit period between two and five years.
Export financing that includes a combination of export credit agency credit and concessional financing. Under the OECD if the subsidy element (concessional) is greater than 35% the entire loan is considered aid. This is also referred to as tied aid.
MULTILATERAL LENDING AGENCY
Financial institution jointly owned by a group of countries designed to promote international and regional economic cooperation. These lending agencies are designed to help develop productive facilities and to further social and economic growth in member countries. Examples are the Asian Development Bank (ADB), the Inter-American Development Bank, the International Finance Corporation (IFC), and the European Bank for Reconstruction and Development (EBRD). For a full list see Trade Finance’s annual World Official Agency Guide.
An expression used to describe the provision of goods or services from a number of different countries.
A type of Islamic finance, Murabaha deals are more usually found in trade finance, typically involving the purchase and sale of commodities to generate a profit, which is a substitute for interest payments on a commercial loan. Kuwait's first low-cost airline, Jazeera Airways, closed an innovative Islamic pre-delivery financing in 2005 (see Airfinance Journal June 2005). Under the terms of a Murabaha agreement, the airline instructs the financier to purchase commodities under a deferred payment arrangement. The financier then sells the commodities to release funds, which are then made available to the airline. The airline then reimburses the financier the cost of the commodities it purchased on an installment basis, which includes an agreed mark-up. The mark-up is the bank's profit and is used as a substitute for the charging of interest. The mark-up can be calculated as a fixed lump sum or as a percentage of the financed amount. This type of structure is Shariah-compliant because the bank takes the title to the commodities, and therefore taking real risk to itself and the airline through the buying and selling of commodities.
NEGOTIATION FEE (MANAGEMENT FEE)
Additional amounts payable to lenders. A once-only fee payable on establishment of the finance.
A bank buying the documents which obtains the right to deal with the documents any way it must to ensure repayment.
A bank designated by the issuing bank to which the beneficiary presents its documents and from which it obtains payment of the credit sum. Depending on the terms of the credit, this may be the issuing bank, the advising bank or some other bank.
Used to facilitate international payments, this is the account of a bank with its agent or correspondent in a foreign country which is recorded in the currency of that country.
A buyer obligated to pay (debtor).
The OrganISation for Economic Cooperation and Development. OECD brings together the governments of countries committed to democracy and the market economy from around the world to: support sustainable economic growth, boost employment, raise living standards, maintain financial stability, assist other countries' economic development and contribute to growth in world trade. The organisation provides a setting where governments compare policy experiences, seek answers to common problems, identify good practice and coordinate domestic and international policies.
An agreement by members of the Organisation for Economic Cooperation and Development (OECD) to limit credit competition among member governments in officially supported export credits. This is commonly known as the arrangement on guidelines for officially supported export credits.
Used by export credit agencies to describe importing countries to which they will no longer extend insurance cover.
Offset is one type of countertrade trading relationship. Offset agreements are usually practised by governments and cover military and important civil procurements. Governments award business to a company in another country, and in return for the contract, the price paid is offset by the company producing the product in the buying country.
OPEN ACCOUNT TRADING
Trading in which the importer pays after the exporter has dispatched the goods.
Meeting of public-sector creditors in Paris to negotiate the rescheduling of sovereign debts.
Sight payment: The credit is payable immediately against presentation of documents.
Negotiation: The credit sum is available immediately against presentation of documents and negotiation (purchase) by the bank of (normally) a bill of exchange (draft) drawn up by the beneficiary.
A bond provided by a bank or an insurance company on behalf of a contractor in favour of the buyer promising compensation, usually on demand for bank bonds, in the event that the goods supplied/services performed do not meet the agreed contractual specifications.
Risk that execution of a contract will be prevented by political causes such as political violence, expropriation or currency inconvertibility. Political risk also covers default by a public-sector buyer.
Financing that takes place before the product is ready for export. For example, an edible oil exporter might receive pre-export finance to enable it to buy seeds which it will eventually use to make the oil. This term is most often used in relation to the petroleum sector.
Event causing loss which occurs after contract signature but before shipment of the goods.
The amount or amounts paid by the insured as consideration for covering the risks.
Political Risk Insurance
Contract value (does not include interest).
PRIME BANK GUARANTEES (PBGs)
Prime bank guarantees are used by fraudsters in schemes which claim that bankers use PBG to raise capital, and that the markets for such transactions are conducted in secret. Investors are tricked into buying into non-existent PBG markets. Sometimes fraudsters may persuade banks to issue PBGs by persuading them that genuine markets exist for these phoney instruments.
Payments due from the buyer to the supplier during the contractual period, which might be financed under a buyer or supplier credit financing.
The debt instrument evidencing an obligation of the importer (buyer) to pay the exporter (seller) or lender in the case of a buyer credit. These notes can be transferred by endorsement.
A legal document showing that a bill of exchange was presented to the drawee for acceptance/payment and was refused.
PROVEN DEFAULT BOND
A bond issued by a surety or insurance company which is a commitment to perform under a contract and/or pay a sum of money. There must be firm proof of the contract being defaulted on.
PURE COVER LOAN
A loan where the interest rate is not officially supported, but where insurance/guarantees are provided to the lenders covering principal plus interest.
RECEIPTS OF SAFEKEEPING
These are used to trick people into parting with funds in fraudulent schemes. A bank customer entrusts documents and/or other items to his bank for safekeeping, and asks the bank to issue a receipt specifying the items deposited. The customer uses the letter to trick victims into parting with money on the false understanding that he is reliable because he has a receipt of safekeeping. In reality, the documents and other others deposited with the bank are worthless.
Money owed to a business for merchandise or services sold on open account. Receivables are a key factor in analyzing a company’s liquidity.
The lender’s right to recover funds (including interest where appropriate) from borrowers if they fail to pay.
A credit where the advising bank makes pre-shipment advance payments to the beneficiary to help with the beneficiary’s pre-export financing.
The authorisation or request to reimburse provided by the issuing bank to the reimbursing bank.
An independent undertaking to reimburse provided by the reimbursing bank in favour of the claiming bank in accordance with a request to that effect by the issuing bank.
A bank designated by the issuing bank from which an authorised bank that has made a payment under the credit may obtain reimbursement.
The bank instructed by the exporter/seller in the handling of collections. The remitting bank will, in its turn, instruct the collecting bank.
The proportion or percentage of the financed amount (principal plus interest), which is not insured/guaranteed by an export credit agency.
A guarantee to a buyer that, if problems occur in a contract subsequent to its completion, retention funds will be callable.
A credit which can be cancelled or amended unilaterally by the issuing bank.
A credit where the amount of available drawings is reinstated automatically after a stated period of time.
The Islamic finance term for interest.
The transformation of the loan asset into a liquid security which is then distributed to investors via the capital markets.
Usually any credit period up to two years.
A loan made at a concessional rate and term.
A buyer that is owned by a national government and carries the full faith and credit backing of that government when entering into sales and credit agreements.
SPECIAL PURPOSE CORPORATION (SPC)
An independent corporation with nominal capital which is a party to an export or project financing for purposes of holding title as a nominee or acting as a conduit of funds.
STANDBY LETTER OF CREDIT
A letter of credit that provides for payment to the beneficiary evidenced by certification that certain contractual obligations have been fulfilled.
This expresses the discount rate as a percentage discounted from the face value given the life of the specific maturity or maturities. A straight discount does not represent a true interest cost.
An Islamic bond financing. A sukuk (which works in a broadly similar way to a conventional securitisation) is a bond or certificate that provides an investor with ownership or part-ownership in the underlying asset, usufruct, or service. A sukuk is often combined with other Islamic structures such as an ijara, a mudaraba or a murabaha. The nature of the underlying asset and terms of the sukuk must be agreed on the subscription date. The sukuk represents beneficial ownership of the underlying assets and therefore entitles its holder to receive a pro rata share of profits generated by the asset (not a fixed return tied to their face value). A Sukuk can also be issued in tradable form and listed on applicable investment exchanges.
A financing arrangement under which the supplier agrees to accept deferred payment terms from the buyer, and funds itself by discounting or selling the bills of exchange or promissory notes so created with a bank in its own country.
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Swing is the term used to describe the amount of imbalance which may arise on a bilateral clearing account.
This is when a third party buys the imbalance that has arisen on a bilateral clearing account in hard currency but at a discounted rate.
A contract that requires the buyer to take and pay for the goods or services only if delivered.
A contract with an unconditional obligation on the buyer to pay even if no goods or services are delivered or provided by the seller.
Tender bonds (or bid bonds) are often stipulated by governments and other public sector agencies in connection with international public invitations to tender. Tenderers must post a bond. This is hoped to deter companies from rejecting the contract when it is awarded to them because they have lost interest in it.
TENDER TO CONTRACT PERIOD
The period of time between submission of a tender and signature of a contract.
In a tolling deal the customer provides the raw material (for example, steel ingots) and hires the capacity of the factory to turn it into the final product (for example, steel tubes). The final product is then supplied to the customer, who pays in cash. Throughout the process, the customer retains ownership of the raw material.
The risk or inability to convert local currency into the currency in which debt is denominated and/or the ability to transfer the funds to the country of the lender/exporter. Also known as conversion risk.
A credit which allows the beneficiary to transfer part, or all, of the credit rights to a third party, or parties, if part shipments are allowed.
This is where a bank in a third country acts as an intermediary between the issuing bank and the advisory bank.
These cover advance payments made by the employer to the contractor for the specific purpose of importing capital goods or materials. Normally they operate from the moment the materials arrive in the port or airport of destination until delivery on site.
UNFAIR CALLING INSURANCE
Insurance to protect the exporter against a bond being called without good reason.
UNIFORM COMMERCIAL CODE (UCC)
The Uniform Commercial Code (UCC) provides comprehensive standard rules of commercial law that are adopted at state level by nearly all the individual states in the US. The UCC is drafted by the National Conference of Commissioners on Uniform State Laws in coordination with the American Law Institute.
UNIFORM CUSTOMS AND PRACTICE FOR DOCUMENTARY CREDITS (UCP)
A set of rules and guidelines, drawn up by the ICC primarily for banks, relating to the issue and handling of letters of credit. It is applied virtually worldwide. The latest revision is UCP600 which came into effect on July 1 2007.
UNIFORM RULES FOR COLLECTION (URC)
A code of practice for banks regarding collections drawn up by the ICC. It is observed by most trading nations.
USANCE LETTER OF CREDIT
A deferred letter of credit without bills or notes issued under it.
The date on which a bond or guarantee expires.
Used to facilitate international payments, this is the account of a bank with an agent or correspondent in a foreign country which is recorded in the currency of the bank’s own country.
Warehouse receipts provide evidence that specified physical assets of a creditor are being held in storage. They may be used as a form of guarantee in countertrade operations.
WORLD TRADE ORGANISATION (WTO)
The WTO is the only global international organization dealing with the rules of trade between nations. At its heart are the WTO agreements, negotiated and signed by the bulk of the world’s trading nations and ratified in their parliaments. The goal is to help producers of goods and services, exporters, and importers conduct their business.
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